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Tuesday, January 28, 2014

Realities of money and class in America

It's always amusing to watch pundits wake up to reality. It's even more amusing watching Americans wake up to reality. After forty solid years of declining incomes, outsourcing, insourcing, de-industrialization, de-unionization, financialization, automation, and predation by the nation's elites, and five years into a punishing depression that seems to have no end, Americans are realizing that there is no longer a middle class, and that they are downwardly mobile.

First up, Paul Krugman, who discovers what I've previously called the "but they have cell phones" argument:

My post on Americans starting to recognize class realities has brought some predictable reactions, which I’d place under two headings: (1) “But they have cell phones!” and (2) it’s about how you behave, not how much money you have.

My answer to both of these would be to say that when we talk about being middle class, I’d argue that we have two crucial attributes of that status in mind: security and opportunity.

By security, I mean that you have enough resources and backup that the ordinary emergencies of life won’t plunge you into the abyss. This means having decent health insurance, reasonably stable employment, and enough financial assets that having to replace your car or your boiler isn’t a crisis.

By opportunity I mainly mean being able to get your children a good education and access to job prospects, not feeling that doors are shut because you just can’t afford to do the right thing.

If you don’t have these things, I would say that you don’t lead a middle-class life, even if you have a car and a few electronic gadgets that weren’t around during the era when most Americans really were middle class, and no matter how clean, sober, and prudent your behavior may be.

Now, according to that Pew survey, in early 2008 only 6 percent of Americans considered themselves lower class — far below the official poverty rate! — only 2 percent upper class, and 1 percent didn’t know. So 91 percent of Americans — roughly speaking, people with incomes between $15,000 and $250,000 — considered themselves middle class. And a large portion of these people were wrong.

Consider health insurance: many Americans with incomes significantly above the poverty line are, or were until very recently uninsured, and many more were at risk of losing coverage. That, to me, says that they weren’t middle class on that basis alone. Many, probably most, low-wage workers have hardly any financial assets, no retirement plan, etc.

What about opportunity? Public schools in America vary widely in quality, and lower-income families can’t afford to live in good districts. College education has become far less accessible as aid to public institutions falls. The chance of finishing college varies drastically with family income (pdf).

I could go on, but surely it’s obvious when you think about it (and if you have any sense of the realities of life). A lot of Americans — quite arguably a majority — just don’t have the prerequisites for middle-class life as we’ve always understood it....The sad thing is that our fetishization of the middle class, our pretense that we’re almost all members of that class, is a major reason so many of us actually aren’t. That’s why the growing appreciation of class realities on the part of the public is a good thing; it raises the chances that we’ll actually start creating the kind of society we only pretend to have.

According to a new Pew survey (pdf), there has been a sharp increase in the number of people calling themselves lower class, and a somewhat smaller rise in the number calling themselves lower-middle, so that at this point the combined “lower” categories are close to a plurality of the population — in fact, closing in on, um, 47 percent.

This is, I believe, a very significant development. The whole politics of poverty since the 70s has rested on the popular belief that the poor are Those People, not like us hard-working real Americans. This belief has been out of touch with reality for decades — but only now does reality seem to be breaking in. But what it means now is that conservatives claiming that character defects are the source of poverty, and that poverty programs are bad because they make life too easy, are now talking to an audience with large numbers of Not Those People who realize that they are among those who sometimes need help from the safety net.

If you actually take a close look at the numbers, it turns out that of the people who identified as middle class in 2008, nearly a third of them now identify as lower middle or lower class. And as dramatic as that sounds, it's actually even more dramatic than those bare words suggest. Class self-identification is deeply tied up with culture, not just income, and this decline means that a lot of people—about one in six Americans—now think of themselves as not just suffering an income drop, but suffering an income drop they consider permanent. Permanent enough that they now live in a different neighborhood, associate with different friends, and apparently consider themselves part of a different culture than they did just six years ago.

I'm going to repeat that: A third of the people who identified as middle class in 2008 now identify as lower middle or lower class. And that happened in a mere six years.

America’s social structure changes slowly and unnoticed, taking us to a future with the class system of the past. Jane Austin would understand this New America, and her books might describe our children’s lives.

Last week I described one such change: how the increased concentration of wealth had created an aristocracy in America, a national class with stronger ties to each other than the elites of their communities. This class then use their increased power to restructure our social institutions to more closely reflect the shape of this New America, subjecting local institutions to centralized control — turning grassroots leaders into functionaries.

Our economic structure regresses to that of the Gilded Age (e.g., crushed unions, shrinking middle class, precarious prosperity of blue collar workers). Similarly the social structure of New America’s aristocracy and gentry echos that of Georgian England, in which marriage customs further concentrated wealth, and social divisions widened to match those of wealth...These classes were broken over several generations by economic changes created by the industrial revolution. Unfortunately the phases of the current technological revolution appear to be having the reverse effect, further concentrating wealth and power.

...they conclude that rising income inequality isn't really due to a rise in assortative mating per se. It's mostly due to the simple fact that more women work outside the home these days. After all, who a man marries doesn't affect his household income much if his wife doesn't have an outside job. But when women with college degrees all started working, it caused a big increase in upper class household incomes regardless of whether assortative mating had increased.

Yeah, that's kind of the point. And then there's this fascinating post at Marginal Revolution:

...Consider Janet Yellen, her recent confirmation to chair the Fed has made her the most powerful woman in the world, the most powerful woman in world history, the world’s second most powerful person, or the world’s most powerful person depending on who you believe. In any case, Yellen is powerful. Moreover, Yellen is married to Nobel prize winner George Akerlof. The fact that two such outstanding individuals should be married to one another is an illustration of assortative mating. Yellen-Akerlof are the 1% of the 1% and all that political and cultural achievement concentrated in one family is an example of the growth of inequality. Tellingly, one of the drivers of this inequality was greater equality of opportunity for women.

Now consider, President Obama’s nomination for Fed vice-chairman, Stanley Fischer. Fischer was born in Zambia, holds dual Israeli-American citizenship and was most recently the governor of the Bank of Israel. In all of US history there is almost no precedent for a former major official of a foreign country to become a major official of the United States. Given all the economists in the United States one might have thought that a suitable candidate could be found without this peculiar history and yet it’s not hard to understand why President Obama has nominated Fischer–to wit, I wouldn’t be surprised if everyone President Obama asked for advice on this question to told him that Fischer would be one of the best people in the entire world for the job.

Indeed, many of the people Obama spoke to, including Ben Bernanke, would have been Fischer’s students, themselves a large subset of the tiny elite of the world’s top monetary economists. Perhaps the world of monetary economics is an inbred clique, a supplier-controlled cartel. Maybe so, but I see this as part of a larger story. Stanley Fischer, rather than thousands of other nearly equally-qualified people, is being nominated to the U.S. Federal Reserve for the same reasons that large firms, compete madly for a handful of CEO’s (in the process bidding up their wages to stratospheric levels).

Consider that even in the rarefied world of monetary policy Fischer’s appointment isn’t unique. In 2012, the British appointed Mark Carney, a Canadian, to be the Governor of the Bank of England, the first non-Briton to ever hold the role. When even Great Britain and the United States find that their home-grown talent isn’t good enough that tells you that the demand for talent is immense. My favorite example of this from the business world is Sergio Marchionne. Marchionne is the CEO of Italy’s Fiat and the Chairman and CEO of Chrysler, among several other positions. He commutes between Italy and the United States, lives in Switzerland, and has dual Italian and Canadian (!) citizenship. Appointments and potential appointments like those of Carney and Fischer illustrate that the demand for talent and the winner-take-all phenomena of a globalized world are not limited to the business world.

Small differences in quality at the top have a greater impact the larger the firm, the market, or the economy. How many truly great decisions did Bill Gates make at Microsoft (compared to another plausible CEO)? I would guess that fewer than 10 decisions made billions of dollars of difference. And if Yellen-Fischer make just a few better calls than their next best counterparts, well that could easily be worth hundreds of billions.

Which reinforces what I've said earlier - the wealth class is now an international class with exclusive access to elite institutions and social circles (on full display recently at Davos, and will be again at the Winter Olympics). While Marx predicted solidarity for the workers of the world, the real people who united were the rich of the world from all different cultures - Europe, China, Africa, Russia, the U.S., Latin America, and so on. Wealthy elites have never been more unified. And the presence of women and non-Europeans is constantly used to bolster the claim that it's all down to "merit." Meanwhile, the working classes of the world have never been more divided - by ethnicity, nationality, class, religion, etc. In Europe they use immigration, in the U.S. it's gay marriage and guns, but the idea is the same.

This is why the warfare of the twenty-first century is going to increasingly be intranational instead of international - elites against their own people. Hence the massive security state apparatus, local police equipped with armored personnel carriers and tear gas, government controls on the internet, widespread surveillance, spying on activist groups, fears of "terrorism," "free speech zones'" etc. For example, the FBI (America's internal police force) recently changed its mission from law enfocement to "national security," whatever that means. Telling. We're already seeing it all over the world.

Meanwhile, some are trumpeting the fact that a new economic study claims that social mobility has not declined at all. This is apparently seen as some sort of validation for the status quo. Dig deeper, and you'll find a few other disturbing facts. As Ross Douthat of the Times (!!) tweeted: "Policy debates aside, isn't there something *existentially* unsettling about idea that US social mobility hasn't changed in 50-60 years?" As another commentator put it with a different spin: "A Better Headline Would be “Mobility Stagnant as U.S. Economy Doubles”. Apparently, all of us who think we're downwardly mobile are just "wrong." Relax everybody, the economy's doing great! I wonder if the social mobility study included the massive amounts of debt it now takes to be "middle class," and how easy it is to fall out of it. I'm guessing no. John Cassidy adds:

Now for the bad news: the Horatio Alger myth is still a myth. Relative to many other advanced countries, the United States remains a highly stratified society, and most poor kids still have few prospects of making big strides. I’ve already mentioned the finding that the odds of a child moving from the bottom fifth of the income distribution to the top fifth are less than one in ten, and have been that way for decades. For children who are born in the second fifth of the income distribution, those who might be categorized as working class or lower-middle class, the probability of moving up to the top quintile has fallen significantly. For someone born in 1971, it was 17.7 per cent; for someone born in 1986, it was 13.8 per cent.

It has been known for some time that social mobility in the United States is lower than in most European countries, and that it trails some of them, such as the Scandinavian nations, by a great deal. The new study doesn’t challenge this finding, nor does it contradict the fact that other indicators of future economic success for young people—such as test scores, levels of parental involvement, and the extent of social connectedness—have exhibited a growing socioeconomic gap, leading Robert Putman and others to predict a sharp fall in social mobility. Indeed, the paper notes, “An important question for future research is why such a plunge in mobility has not occurred.”

Finally, the new study doesn’t mean that the effects of inequality aren’t more serious than they used to be. With inequality rising, particularly at the top, the rewards for clambering up the income distribution are greater, and so are the costs of getting stuck at the bottom. “The consequences of the ‘birth lottery’—the parents to whom a child is born—are larger today than in the past,” the paper notes. Or, as Saez said to the Times, “The level of opportunity is alarming, even though it’s stable over time.”

The economist Lawrence Katz, an important thinker is this debate because of his deep contributions to the literature on education as a wage determinant, agrees: “The only moments we’ve had of broadly shared prosperity have been in tight labor markets.”

Absent more individual and collective bargaining power for the vast majority of workers who lack it, some of whom have college degrees, we will be hard pressed to turn these wage trends around. Such power is not the only determinant of wages, but it may well be the most important and the one most sorely lacking.